Irish Finance Bill 2022: Pillar Two changes for R&D & KDB regimes

Introduction – Irish Finance Bill 2022

The Irish Finance Bill 2022 provides for changes to:

• the Research and Development (R&D) tax credit; and
• Knowledge Development Box tax regime

Both changes are to reflect the OECD’s Pillar Two model rules and the EU’s draft Pillar Two Directive.

Ireland’s R&D regime

Ireland has an attractive R&D tax credit for qualifying expenditure on R&D activities. This includes certain expenditure on plant and machinery and buildings.

The credit is currently 25% of the allowable expenditure.

The mechanics of the regime are that the tax credit can be offset against the claiming company’s current and prior year corporation tax liability. In addition, any excess credit may be:

• carried forward against future corporation tax labilities of the company;
• or claimed as a payable credit in three instalments over a period totalling 33 months

Pillar and post?

The OECD Pillar Two model rules and the EU draft Pillar Two Directive introduce the concept of a “qualified refundable tax credit” (QRTC).

Going forward, the R&D tax credit regime in Ireland will need to be consistent with QRTC requirements.

In order to qualify as a QRTC require, the tax credit to be paid as cash (or available as cash equivalents) within four years of the date on which the taxpayer is first entitled to it.

How does a QRTC interact with the Global Minimum Corporate Tax Rate?

A tax credit that qualifies as a QRTC will be treated as income and not as a reduction in taxes paid. This is important when it comes to calculating the relevant effective rate of tax rate for the purposes of the global minimum corporate tax rate.

Irish Finance Bill 2022 proposals

The Finance Bill proposals seek to revise the R&D tax credit so that it is consistent with the QRTC criteria. This will include providing that the credit is fully payable in cash or cash equivalents.

The new proposals under the Finance Bill measures provide that the first instalment of the R&D tax credit should be equal to the greater of:

• €25,000 or, if lower, the total amount of the credit claimed; or
• 50% of the value of the credit claimed, with the balance of the credit being refunded in the subsequent two periods.

The cap on payable credits linked to the corporation tax/payroll tax payments will no longer apply.

A consequence of the change is that companies that could have obtained the full value of the credit in a current year versus their corporation tax liabilities, will now instead see that benefit spread over three years.

In addition, to ensure alignment with the Pillar Two rules, the R&D credit should be paid within the four-year period. This includes where there is an open investigation by the tax authority.

Knowledge Development Box (“KDB”)

The Finance Bill also provides for Pillar Two related changes to Ireland’s KDB.

The KDB is a form of patent box regime and provides for a 50% reduction of qualifying income. This results in an effective tax rate of 6.25% for the taxpayer in respect of the qualifying income.

However, the requirements are relatively strict and it is understood that uptake has been limited

The Finance Bill measures provide that the KDB trading expense deduction is reduced from 50% to 20% of qualifying income. This results in a new effective rate of 10% as opposed to the existing 6.25% on qualifying income.

If you have any queries about the Irish Finance Bill 2022, or Irish tax matters more generally, then please do not hesitate to get in touch.

The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article